price elasticity

[dvani]

In ch 6 it is said that "if demand is price elastic ,i.e the price elasticity of demand <-1 then a reduction in price will lead to greater percentage increase in quantity demanded " what does this statement mean ?
is there any difference between "demand being elastic" and" demand is price elastic" ?

 

[Margaret Wood]

Elasticity is about stretchiness or responsiveness. If you say demand is elastic, it means it is responsive. What is it responsive to?

We mainly talk about price elasticity of demand; this tells us how much demand changes if price changes. For example, if the price elasticity of demand is -2, this means that an increase in price of 10% would lead to a 20% decrease in quantity demanded. [If the absolute value is greater than 1, we say that demand is price elastic (or sometimes we just say "elastic" if it's obvious that we're talking about price elasticity) because the change in price has brought about a more than proportionate change in quantity demanded.]

However, we also measure income elasticity of demand, which tells us how much demand changes if there's a change in income, and cross elasticity of demand, which tells us how much demand for Good X changes if the price of Good Y changes.

We also measure price elasticity of supply, which measures how much supply changes if price changes. For example, if the price elasticity of supply is 0.4, then a 10% increase in price leads to a 4% increase in supply. This is called a relatively inelastic supply because the increase in price leads to a less than proportionate increase in supply.

 

[dvani]

Elasticity is about stretchiness or responsiveness. If you say demand is elastic, it means it is responsive. price [/I.

but in ch 3 of material it says that if PED < 1 it is inelastic i.e change in price shows a little change in quantity than how can we say that price is elastic when PED<-1 ?

 

[Sanjay]

but in ch 3 of material it says that if PED < 1 it is inelastic i.e change in price shows a little change in quantity than how can we say that price is elastic when PED<-1 ?

You're confused.Miss Wood is defining the term in general. If demand for a commodity is less elastic it is inelastic. Consider a test for "Intelligence". Now Wooster and Jeeves, best friends, scored 45 and 85 respectively. Can we not then say, that Wooster is "less intelligent" than Jeeves?. It does not mean that everyone who sat for the test is intelligent just because they all participated in the I.Q test. But instead we are looking for whether they are "more" or"less" intelligent when compared to others

The same thing applies even here.

 

[Margaret Wood]

Price elasticity of demand is always negative (as long as we have a downward-sloping demand curve), ie if price increases, quantity demanded decreases. The question is: how much does it decrease?

If there's a 10% increase in price and quantity demanded falls by 2%, the PED=-0.2. We say this is a relatively inelastic demand because the change in price has led to a less than proportionate change in quantity demanded.

If there's a 10% increase in price and quantity demanded falls by 50%, the PED=-5. We say this is a relatively elastic demand because the change in price has led to a more than proportionate change in quantity demanded.

 

[dvani]

Price elasticity of demand is always negative (as long as we have a downward-sloping demand curve),

Thanks I got it, I was bit confused.
can you pls explain me in general how to solve sums ?
If we are given consumption and investment function .
for example here
Consumption and investment function in a closed economy without government are given
respectively by C = 100 + .7Y and I = 200 + .1Y .
how to find equilibrium?

Thank you